Why the Overstock Inventory Issue Matters

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It has been suggested that discussing the inventory issues at Overstock.com is a waste of time. Surely there is more interesting stuff going on. like Sith Lords and such.

So I’ll explain why it’s so important.

Inventory is a financial statement line item that is notorious for being abused. Some companies are loath to record proper reserves, and so inventory may be on the balance sheet at too high a value. On the other hand, when a company has a really good quarter, it may be tempting to overstate the reserve to create a little “cookie jar” for later. (The idea is that we recognize additional expense in this good quarter, since we still have “room” for more expenses. Then during a later quarter when numbers aren’t as good, we can dip into that reserve to pump up the earnings.) Continue reading